Diagnosing the Problem: Exploring the E ects of ...

Diagnosing the Problem: Exploring the Effects of Consolidation and Anticompetitive Conduct in Health Care Markets

Statement before the Committee on the Judiciary Subcomittee on Antitrust, Commercial, and Administrative Law

U.S. House of Representatives by

Martin Gaynor E.J. Barone University Professor of Economics and Public Policy

Heinz College Carnegie Mellon University

Washington, D.C. March 7, 2019

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Summary of Statement

? Health care is a very large and important sector of our economy. Not only is the health care sector 1/5th of the economy, it has a critical impact on our health and wellbeing.

? The U.S. health care system is based on markets. The system will work only as well as the markets that underpin it.

? These markets do not function as well as they could, or should. Prices are high and rising, there are egregious pricing practices, quality is suboptimal, and the sector is sluggish and unresponsive, in contrast to the innovation and dynamism which characterize much of the rest of our economy.

? Lack of competition has a lot to do with these problems.

? There has been a great deal of consolidation in health care. There have been nearly 1,600 hospital mergers in the past twenty years, with over 450 since 2012. The result is that the majority of local areas are now dominated by one large, powerful health system, e.g., Boston (Partners), Pittsburgh (UPMC), and San Francisco (Sutter).

? Insurance markets are also highly consolidated. The two largest insurers have 70 percent of the market or more in one-half of all local insurance markets.

? Physician services markets have also become increasingly more concentrated. Twothirds of specialist physician markets are highly concentrated, and 29 percent for primary care physicians.

? There were nearly 31,000 physician practice acquisitions by hospitals from 2008-2012, and over 33 percent of all physicians are now in hospital owned practices.

? Extensive research evidence shows that consolidation between close competitors leads to substantial price increases for hospitals, insurers, and physicians, without offsetting gains in improved quality or enhanced efficiency. Further, recent evidence shows that mergers between hospitals not in the same geographic area can also lead to increases in price. Just as seriously, if not more, evidence shows that patient quality of care suffers from lack of competition. Last, competition affects the form of payment ? hospitals with fewer competitors negotiate more favorable forms of payment and reject those they dislike. This poses a serious challenge for payment reform.

? Research evidence shows not-for-profit hospitals exploit market power just as much as for-profits.

? It is also possible that hospital mergers lead to, or enhance monopsony power in labor markets. This can depress wages below the efficient level, distort hiring decisions, and in the long run, harm incentives for investment in human capital. Recent evidence shows impacts of hospital mergers consistent with these concerns.

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? There are also concerns about anticompetitive conduct. Firms who have acquired market power have an incentive to maintain or enhance it.

? Some dominant health systems have been using restrictive contracts with insurers to try to hamper the free flow of patients to competitors, thereby harming competition and enhancing their market power.

? There are extensive reports of health systems engaging in "data blocking" ? impeding the flow of patient information to providers outside the system. This has the potential to harm competition by making it more difficult for patients to switch providers.

Now that most hospital markets are dominated by one large health system, there is considerable potential for this kind of conduct seriously harming competition.

? This is causing serious harm to patients and to the health care system as a whole.

? Americans who live in rural areas are particularly vulnerable to these harms because their alternatives to a dominant or monopoly provider are often far away.

? Policies are needed to support and promote competition in health care markets. This includes ending distortions that unintentionally incentivize consolidation, and policies to strengthen choice and competition.

? These include:

? End policies that unintentionally incentivize consolidation. ? End policies that hamper new competitors and impede competition. ? Promote transparency, so employers, policymakers, and consumers have access to

information about health care costs and quality. ? Focus and strengthen antitrust enforcement. In particular:

Give the DOJ and FTC the resources they need to be effective, not just to do more enforcement in existing areas, but to be able to proactively invest to address new and developing issues.

Permit the FTC to enforce against anticompetitive actions by not-for-profits. Permit the FTC to use its Section 6b authority to study the insurance indus-

try. Require simple reporting of small transactions that fall below the Hart-Scott-

Rodino reporting requirements, so that the enforcement agencies can track physician practice mergers and hospital acquisitions of physician practices. Study "vertical" aspects of hospital-physician acquisitions and develop theory and evidence on competitive impacts, including harms and efficiencies.

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 Study anticompetitive conduct in health care, particularly the use of restrictive clauses in health system-insurer contracts and data blocking, and develop theories and evidence on their competitive impacts (both harms and efficiencies).

Consider legislation to alter the antitrust laws, specifically changing the standard plaintiffs have to meet, and changing the criteria to be met for presumption of harm to competition.

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Statement

Chair Ciciline, Ranking Member Sensenbrenner, and Members of the Subcommittee, thank you for holding a hearing on this vitally important topic and for giving me the opportunity to testify in front of you today.

1 My Background

I am an economist who has been studying the health care sector, and specifically health care markets and competition, for nearly 40 years. I am a Professor of Economics and Public Policy at the Heinz College of Public Policy at Carnegie Mellon University in Pittsburgh. I served as the Director of the Bureau of Economics at the Federal Trade Commission during 2013-2014, during which time I was involved in the many health care matters that came before the Commission. I have also served the Commonwealth of Pennsylvania as a member of the Governor's Health Advisory Board and as Co-Chair of its Working Group on Shoppable Health Care.

Much of my research is directly relevant to the topic of this hearing. My project with colleagues Zack Cooper, Stuart Craig, and John Van Reenen exploits newly available data on nearly 90 million individuals with private, employer sponsored health insurance nationwide to examine variation in health care spending and prices for the privately insured (Cooper et al., 2019). One of our key findings is that hospitals that have fewer potential competitors nearby have substantially higher prices. For example, monopoly hospitals' prices are on average 12 percent higher than hospitals with 3 or more potential competitors nearby. The prices of hospitals who have one other nearby potential competitor are on average 7.3 percent higher. We also examine all hospital mergers in the United States over a five year period, and find that the average merger between two nearby hospitals (5 miles or closer) leads to a price increase of 6 percent. Further, our evidence shows that prices continue to rise for at least two years after the merger. Last, we find that hospitals that face fewer competitors can negotiate more favorable forms of payments, and resist those they dislike ? a serious issue for payment reform.

My papers with Katherine Ho and Robert Town, "The Industrial Organization of Health Care Market," (Gaynor et al., 2015), with Robert Town, "Competition in Health Care Markets," (Gaynor and Town, 2012a), and "The Impact of Hospital Consolidation: Update" (Gaynor and Town, 2012b) are also relevant to the topic of this hearing. In those papers my co-authors and I review the research evidence on health care markets and competition. We find that there is extensive evidence that competition leads to lower prices, and often improves quality, whereas consolidation between close competitors does the opposite.

My recent White Paper with Farzad Mostashari and Paul Ginsburg (Gaynor et al., 2017) is also directly relevant to the topic of this hearing. In this White Paper Mostashari, Ginsburg, and I identify factors that are impeding the effective functioning of health care markets and propose a number of actionable solutions to make health care markets work better.

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It is also notable that there is a great deal of overlap between the analysis and recommendations in our White Paper and recent reports by the Departments of Health and Human Services, Treasury, and Labor (Azar et al., 2018), Center for American Progress (Gee and Gurwitz, 2018), and the American Enterprise Institute and the Brookings Institution (Aaron et al., 2019).

2 Introduction

Health care is a very large and important industry. Health care spending is now over $3.5 trillion and accounts for approximately 18 percent of GDP ? nearly one-fifth of the entire U.S. economy (Martin et al., 2019). Hospital and physician services are a large part of the U.S. economy. In 2017, hospital care alone accounted for almost one-third of total health spending and 5.9% of GDP ? roughly twice the size of automobile manufacturing, agriculture, or mining, and larger than all manufacturing sectors except food and beverage and tobacco products, which is approximately the same size. Physician services comprise 3.6% of GDP (Martin et al., 2019). The net cost of health insurance ? current year premiums minus current year medical benefits paid ? was 1.2% of GDP in 2017. The share of the economy accounted for by these sectors has risen dramatically over the last 30 years. In 1980, hospitals and physicians accounted for 3.6% and 1.7% of U.S. GDP, respectively, while the net cost of health insurance in 1980 was 0.34% (Martin et al., 2011).

Of course, health care is important not only because of its size. Health care services can save lives or dramatically affect the quality of life, thereby substantially improving well being and productivity.

As a consequence, the functioning of the health care sector is vitally important. A well functioning health care sector is an asset to the economy and improves quality of life for the citizenry. By the same token, problems in the health care sector act as a drag on the economy and impose a burden on individuals.

The U.S. health care system is based on markets. The vast majority of health care is privately provided (with some exceptions, such as public hospitals, the Veterans Administration, and the Indian Health Service) and over half of health care is privately financed (Martin et al., 2019). As a consequence, the health care system will only work as well as the markets that underpin it. If those markets function poorly, then we will get health care that's not as good as it could be and that costs more than it should. Moreover, attempts at reform, no matter how important or clever, will not prove successful if they are built on top of dysfunctional markets.

There is widespread agreement that these markets do not work as well as they could, or should. Prices are high and rising (Rosenthal, 2017; National Academy of Social Insurance, 2015; New York State Health Foundation, 2016), they vary in seemingly incoherent ways, there are egregious pricing practices (Cooper and Scott Morton, 2016; Rosenthal, 2017; Gar-

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mon and Chartock, 2017; Kliff, 2019), there are serious concerns about the quality of care (Institute of Medicine, 2001; Kohn et al., 1999; Kessler and McClellan, 2000), and the system is sluggish and unresponsive, lacking the innovation and dynamism that characterize much of the rest of our economy (Cutler, 2010; Chin et al., 2015; Herzlinger, 2006).

One of the reasons for this is lack of competition. The research evidence shows that hospitals and doctors who face less competition charge higher prices to private payers, without accompanying gains in efficiency or quality. Research shows the same for insurance markets. Insurers who face less competition charge higher premiums, and may pay lower prices to providers. Moreover, the evidence also shows that lack of competition can cause serious harm to the quality of care received by patients.

It's important to recognize that the burden of higher provider prices falls on individuals, not insurers or employers. Health care is not like commodity products, such as milk or gasoline. If the price of milk or gasoline goes up, consumers experience directly when they purchase these products. However, even though individuals with private employer provided health insurance pay a small portion of provider fees directly out of their own pockets, they end up paying for increased prices in the end. Insurers facing higher provider prices increase their premiums to employers. Employers then pass those increased premiums on to their workers, either in the form of lower wages (or smaller wage increases) or reduced benefits (greater premium sharing or less extensive coverage, including the loss of coverage) (Gruber, 1994; Bhattacharya and Bundorf, 2005; Baicker and Chandra, 2006; Emanuel and Fuchs, 2008; Baicker and Chandra, 2006; Currie and Madrian, 2000; Anand, 2017). As mentioned previously, when consolidation leads to providers obtaining higher prices from insurers the impact ultimately falls on consumers, not insurers or employers. Figure 1 illustrates this. Workers' contributions to health insurance premiums grew 259 percent from 1999 to 2018, while wages grew by only 68 percent (Henry J. Kaiser Family Foundation, 2018).

The burden of private health care spending on U.S. households has been growing, so much so that it's taking up a larger and larger share of household spending and exceeding increases in pay for many workers. Figure 2 illustrates that middle class families' spending on health care has increased 25 percent since 2007, crowding out spending on other goods and services, including food, housing, and clothing. Health insurance fringe benefits for workers, chief among which is health care, increased as a share of workers' total compensation over this same period, growing from 12 to 14.5 percent, while wages stayed flat (see Monaco and Pierce, 2015, Table 1).

As documented below, there has been a tremendous amount of consolidation among health care providers. Consolidation has also been occurring among health insurers. It's important to be clear that consolidation can be either beneficial or harmful. Consolidation can bring efficiencies ? it can reduce inefficient duplication of services, allow firms to combine to achieve efficient size, or facilitate investment in quality or efficiency improvements. Successful firms may also expand by acquiring others. If firms get larger by being better at giving consumers what they want or driving down costs so their goods are cheaper, that's a good

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thing (big does not equal bad), so long as they don't engage in actions to attempt to then limit competition. On the other hand, consolidation can reduce competition and enhance market power and thereby lead to increased prices or reduced quality. Moreover, firms that have acquired market power have strong incentives to maintain or enhance it. This leads to the potential for anticompetitive conduct by firms that have acquired dominant positions through consolidation.

3 Consolidation

There has been a tremendous amount of consolidation in the health care industry over the last 20 years. A recent paper by Fulton (2017) documents these trends and shows high and increasing concentration in U.S. hospital, physician, and insurance markets. Figure 5 illustrates these trends from 2010 to 2016, using the Herfindahl-Hirschman Index (HHI) measure of market concentration.1

3.1 Hospitals

The American Hospital Association documents 1,577 hospital mergers from 1998 to 2017, with 456 occurring over the five years from 2013 to 2017. Figure 3 illustrates the number of mergers and the number of hospitals involved in these transactions from 1998 to 2017. A trade publication documents an additional 90 announced hospital mergers in 2018 (Kaufman Hall, 2019).

While some of these mergers may have little or no impact on competition, many include mergers between close competitors, especially given that hospital markets are already highly concentrated. Figure 4 shows that almost half of the hospital mergers occurring from 2010 to 2012 were between hospitals in the same area.2 Further, as indicated below, recent evidence indicates that even mergers between hospitals in different may lead to higher priceas.

As a result of this consolidation, the majority of hospital markets are highly concentrated, and many areas of the country are dominated by one or two large hospital systems with no close competitors (Cutler and Scott Morton, 2013; Fulton, 2017).3 This includes places

1The HHI is equal to the sum of firms' market shares. It reaches a maximum of 10,000 when there is only one firm in the market. It gets smaller the more equal are firms' market shares and the more firms there are in the market.

2The areas used are Core Based Statistical Areas. For a definition see (p. A-15 in U.S. Census Bureau, 2012)

3Fulton (2017) reports that 90 percent of Metropolitan Statistical Areas (MSAs) were highly concentrated for hospitals. The U.S. antitrust enforcement agencies define an HHI of 2,500 or above as "highly concentrated" (Federal Trade Commission and Department of Justice, 1992). My co-authors Zack Cooper, Stuart Craig, John Van Reenen, and I have calculated that the largest health system has over 50 percent of the market in 62 percent of areas in the country (commuting zones).

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